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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 0-51813
 
LIQUIDITY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware 52-2209244
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
   
6931 Arlington Road, Suite 200, Bethesda, MD

 20814
(Address of Principal Executive Offices) (Zip Code)
 
(202) 467-6868
(Registrant’s Telephone Number, Including Area Code) 
 
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Securities registered to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.001 par valueLQDTNasdaq
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
 
Accelerated filer ☒
   
Non-accelerated filer ☐
 
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of August 3, 2020 was 34,045,094.




INDEX
 
  Page
PART I. FINANCIAL INFORMATION  
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION 
Item 1.
Item 1A.
Item 6.

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Table of Contents
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.
Liquidity Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, Except Par Value)
June 30, 2020September 30, 2019
 (Unaudited)
Assets  
Current assets:  
Cash and cash equivalents$72,729  $36,497  
Short-term investments  30,000  
Accounts receivable, net of allowance for doubtful accounts of $357 and $291
5,159  6,704  
Inventory, net7,415  5,843  
Prepaid taxes and tax refund receivable3,081  2,531  
Prepaid expenses and other current assets6,546  8,350  
Total current assets94,930  89,925  
Property and equipment, net of accumulated depreciation of $13,678 and $10,566
18,500  18,846  
Operating lease assets9,263  —  
Intangible assets, net5,086  6,043  
Goodwill59,587  59,467  
Deferred tax assets821  866  
Other assets10,677  12,136  
Total assets$198,864  $187,283  
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$29,002  $15,051  
Accrued expenses and other current liabilities17,757  28,794  
Current portion of operating lease liabilities4,127  —  
Distributions payable  1,675  
Deferred revenue3,025  3,049  
Payables to sellers26,325  20,253  
Total current liabilities80,236  68,822  
Operating lease liabilities5,908  —  
Deferred taxes and other long-term liabilities2,482  2,286  
Total liabilities88,626  71,108  
Commitments and contingencies (Note 11)00
Stockholders’ equity:  
Common stock, $0.001 par value; 120,000,000 shares authorized; 34,021,773 shares issued and outstanding at June 30, 2020; 33,687,115 shares issued and outstanding at September 30, 2019
34  34  
Additional paid-in capital246,016  242,686  
Accumulated other comprehensive loss(8,019) (7,973) 
Accumulated deficit(127,793) (118,572) 
Total stockholders’ equity110,238  116,175  
Total liabilities and stockholders’ equity$198,864  $187,283  
 
See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Data)




 Three Months Ended June 30,Nine Months Ended June 30,
 2020201920202019
(Unaudited)
Revenue$30,442  $36,388  $95,994  $109,478  
Fee revenue17,280  20,494  54,056  58,257  
Total revenue47,722  56,882  150,050  167,735  
Costs and expenses from operations:   
Cost of goods sold (excludes depreciation and amortization)22,494  25,337  73,289  75,100  
Seller distributions  2,994    8,393  
Technology and operations9,515  12,145  32,342  38,098  
Sales and marketing7,412  8,771  27,126  26,887  
General and administrative6,217  8,959  21,321  26,217  
Depreciation and amortization1,567  1,206  4,716  3,575  
Other operating expenses319  2,031  500  3,586  
Total costs and expenses47,524  61,443  159,294  181,856  
Income (loss) from operations198  (4,561) (9,244) (14,121) 
Interest and other income, net(224) (454) (733) (1,224) 
Income (loss) before provision for income taxes422  (4,107) (8,511) (12,897) 
Provision for income taxes209  542  710  1,136  
Net income (loss)$213  $(4,649) $(9,221) $(14,033) 
Basic income (loss) per common share$0.01  $(0.14) $(0.27) $(0.43) 
Diluted income (loss) per common share$0.01  $(0.14) $(0.27) $(0.43) 
Basic weighted average shares outstanding33,695,936  33,164,750  33,621,740  32,986,040  
Diluted weighted average shares outstanding33,815,332  33,164,750  33,621,740  32,986,040  
 
See accompanying notes to the unaudited consolidated financial statements.
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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in Thousands)




 Three Months Ended June 30,Nine Months Ended June 30,
 2020201920202019
(Unaudited)
Net income (loss)$213  $(4,649) $(9,221) $(14,033) 
Other comprehensive income (loss):    
Foreign currency translation424  (255) (46) (484) 
Other comprehensive income (loss)424  (255) (46) (484) 
Comprehensive income (loss)$637  $(4,904) $(9,267) $(14,517) 
 
See accompanying notes to the unaudited consolidated financial statements.


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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Dollars In Thousands)






 Common Stock
 SharesAmountAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
(Unaudited)
Balance at September 30, 201933,687,115  $34  $242,686  $(7,973) $(118,572) $116,175  
Net loss—  —  —  —  (5,196) (5,196) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units            283,164  —  2  —  —  2  
Taxes paid associated with net settlement of stock compensation awards(67,688) —  (498) —  —  (498) 
Forfeitures of restricted stock awards(15,000) —  —  —  —    
Stock compensation expense —  —  1,121  —  —  1,121  
Foreign currency translation—  —  —  833  —  833  
Balance at December 31, 201933,887,591  34  243,311  (7,140) (123,768) 112,437  
Net loss—  —  —  —  (4,238) (4,238) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units111,272  —  32  —  —  32  
Taxes paid associated with net settlement of stock compensation awards(10,065) —  (60) —  —  (60) 
Stock compensation expense—  —  1,244  —  —  1,244  
Foreign currency translation—  —  —  (1,303) —  (1,303) 
Balance at March 31, 202033,988,798  34  244,527  (8,443) (128,006) 108,112  
Net income—  —  —  —  213  213  
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units34,185  —  1  —  —  1  
Taxes paid associated with net settlement of stock compensation awards(1,210) —  (6) —  —  (6) 
Stock compensation expense—  —  1,494  —  —  1,494  
Foreign currency translation—  —  —  424  —  424  
Balance at June 30, 202034,021,773  $34  $246,016  $(8,019) $(127,793) $110,238  


See accompanying notes to the unaudited consolidated financial statements.
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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)


 Nine Months Ended June 30,
 20202019
(Unaudited)
Operating activities  
Net loss$(9,221) $(14,033) 
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization4,716  3,575  
Stock compensation expense3,785  5,138  
Provision for doubtful accounts131  184  
Deferred tax provision228  81  
Loss (gain) on disposal of property and equipment(29) 20  
Change in fair value of earnout liability200  2,300  
Changes in operating assets and liabilities:  
Accounts receivable1,415  (1,056) 
Inventory(1,572) 1,231  
Prepaid and deferred taxes(551) 47  
Prepaid expenses and other assets942  244  
Operating lease assets and liabilities(165) —  
Accounts payable13,951  (570) 
Accrued expenses and other current liabilities(9,525) (777) 
Distributions payable(1,675) (301) 
Deferred revenue(23) 1,043  
Payables to sellers6,072  (4,129) 
Other liabilities522  (222) 
Net cash provided by (used in) operating activities9,201  (7,225) 
Investing activities  
Increase in intangibles(53) (20) 
Purchases of property and equipment, including capitalized software(3,608) (4,784) 
Proceeds from sales of property and equipment47  112  
Proceeds from promissory note2,553    
Purchases of short-term investments(25,000) (50,000) 
Maturities of short-term investments55,000  40,000  
Net cash provided by (used in) investing activities28,939  (14,692) 
Financing activities  
Payments of the principal portion of finance lease liabilities(26) —  
Taxes paid associated with net settlement of stock compensation awards(564)   
Proceeds from exercise of stock options36  129  
Payment of earnout liability related to business acquisition(1,200)   
Net cash (used in) provided by financing activities(1,754) 129  
Effect of exchange rate differences on cash and cash equivalents(154) (246) 
Net increase (decrease) in cash and cash equivalents36,232  (22,034) 
Cash and cash equivalents at beginning of period36,497  58,448  
Cash and cash equivalents at end of period$72,729  $36,414  
Supplemental disclosure of cash flow information  
Cash paid for income taxes, net$203  $872  

See accompanying notes to the unaudited consolidated financial statements.
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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements

1. Organization

Liquidity Services, Inc. (the Company) operates a network of ecommerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. The Company’s marketplaces provide professional buyers access to a global, organized supply of new, surplus and scrap assets presented with digital images and other relevant product information. Additionally, the Company enables corporate and government sellers to enhance their financial return on offered assets by providing a liquid marketplace and value-added services that encompass the consultative management, valuation and sale of surplus assets. The Company's services include program management, valuation, asset management, reconciliation, refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer support, compliance and risk mitigation, as well as self-directed service tools for its sellers. The Company organizes the products on its marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. Currently, the Company’s marketplaces are: www.liquidation.com, www.govdeals.com, www.networkintl.com, www.secondipity.com, and www.go-dove.com. The Company also operates a global search engine for listing used machinery and equipment for sale at www.machinio.com. The Company has four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. See Note 12 in the Notes to the Consolidated Financial Statements for Segment Information.

The Company's operations are subject to certain risks and uncertainties, many of which are associated with technology-oriented companies, including, but not limited to, the Company's dependence on use of the Internet; the effect of general business and economic trends, including the extent and duration of the COVID-19 pandemic; the Company's susceptibility to rapid technological change; actual and potential competition by entities with greater financial and other resources; and the potential for the commercial sellers from which the Company derives a significant portion of its inventory to change the way they conduct their disposition of surplus assets or to otherwise terminate or not renew their contracts with the Company.

2.  Summary of Significant Accounting Policies

Unaudited Interim Financial Information
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation, have been included. The information disclosed in the notes to the consolidated financial statements for these periods is unaudited. Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020 or for any future period. 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts in the consolidated financial statements and accompanying notes. For the three and nine months ended June 30, 2020, these estimates required the Company to make assumptions about the extent and duration of the COVID-19 pandemic and its impacts on the Company's results of operations. As there remains uncertainty associated with the COVID-19 pandemic, the Company will continue to update its assumptions as conditions change. Actual results could differ significantly from those estimates.

Leases

The Company adopted Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842) effective October 1, 2019. As a result of adopting ASC 842, there have been significant changes to the Company's lease accounting policy from the disclosures in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019. These changes are described below.

The Company determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract provides the right to control the use of an identified asset for a period of time.

Lease assets and liabilities are recognized at the lease commencement date at an amount equal to the present value of the lease payments to be made over the lease term. The lease payments represent the combination of lease and nonlease components. The discount rate used to determine the present value is the Company’s incremental borrowing rate for a duration that is
8

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


consistent with the lease term, as the rates implicit in the Company’s leases are generally not determinable. The Company’s incremental borrowing rate is estimated using publicly-available information for companies with comparable financial profiles, adjusted for the impact of collateralization. The lease term includes the impacts of options to extend or terminate the lease only if it is reasonably certain that the option will be exercised.

Lease expense related to operating lease assets and liabilities is recognized on a straight-line basis over the lease term. Lease expense related to finance lease assets is recognized on a straight-line basis over the shorter of the useful life of the asset or the lease term, while lease expense related to finance lease liabilities is recognized using the interest method. Lease-related payments not included in the determination of the lease assets and liabilities, such as variable lease payments, are expensed as incurred.

Lease assets and liabilities are not recognized when the lease term is 12 months or less, however, short-term lease expense is still recognized on a straight-line basis over the lease term.

Balances related to the Company's finance leases are included with Other assets (finance lease assets), Accrued expenses and other liabilities (current portion of finance lease liabilities), and Deferred taxes and other long-term liabilities (non-current portion of finance lease liabilities).

Lease assets are assessed for impairment in accordance with the Company’s accounting policy for the impairment of long-lived assets.

Contract Assets and Liabilities

Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with a seller. The contract asset balance was $0.5 million as of June 30, 2020 and $0.3 million as of September 30, 2019 and is included in the line item Prepaid expenses and other current assets on the Consolidated Balance Sheets.

Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from up-front payments received in connection with Machinio's subscription services. The contract liability balance was $3.0 million as of June 30, 2020 and $3.0 million as of September 30, 2019, and is included in the line item Deferred revenue on the Consolidated Balance Sheets. Of the September 30, 2019 contract liability balance, $2.8 million was earned as Fee revenue during the nine months ended June 30, 2020.

The $3.0 million contract liability balance as of June 30, 2020 also represents the Company's remaining performance obligations related to contracts with customers that are one year or greater in duration. The Company expects to recognize the substantial majority of that amount as Fee revenue over the next 12 months.

Contract Costs

Contract costs relate to sales commissions paid on subscription contracts that are capitalized. Contract costs are amortized over the expected life of the customer contract. The contract cost balance was $0.6 million as of June 30, 2020 and $0.5 million as of September 30, 2019 and is included in the line item Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheet. Amortization expense was immaterial during the three and nine months ended June 30, 2020 and 2019.

Other Assets - Promissory Note

On September 30, 2015, the Company sold certain assets related to its Jacobs Trading business to Tanager Acquisitions, LLC (Tanager). In connection with the disposition, Tanager assumed certain liabilities related to the Jacobs Trading business. Tanager issued a $12.3 million five-year interest-bearing promissory note to the Company.

On October 10, 2019, the Company entered into a Forbearance Agreement and Amendment to Note, Security Agreement and Guaranty Agreement (the "Forbearance Agreement") with Tanager (now known as Jacobs Trading, LLC) and certain of its affiliates (collectively, "JTC"). In exchange for additional collateral, security, and a higher interest rate, the Company granted JTC a new repayment schedule that requires quarterly payments to be made from August 2020 to August 2023. Upon execution of the Forbearance Agreement, JTC repaid $2.5 million in principal, plus $0.4 million in accrued interest. JTC had the opportunity to prepay the full amount remaining before May 15, 2020 at a $0.5 million discount. Of the $12.3 million owed to the Company, $6.6 million has been repaid as of June 30, 2020.

9

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


The Company considered the terms of the Forbearance Agreement and the cash flows expected to be received from JTC under the new repayment schedule in concluding that it remains probable that the Company will collect the amounts due to the Company as of June 30, 2020 and that no impairment loss has been incurred. Of the $5.7 million outstanding at June 30, 2020, $4.2 million is recorded in Other assets, and $1.5 million is recorded in Prepaid expenses and other current assets, based on the scheduled repayment dates.

Risk Associated with Certain Concentrations

The Company does not perform credit evaluations for the majority of its buyers. However, most sales are recorded subsequent to payment authorization being received. As a result, the Company is not subject to significant collection risk, as most goods are not shipped before payment is received.

For consignment sales transactions, funds are typically collected from buyers and are held by the Company on the sellers' behalf in Payables to sellers on the Consolidated Balance Sheets. The Company releases the funds, less the Company's commission and other fees due, to the seller through Accounts payable after the buyer has accepted the goods or within 30 days, depending on the state where the buyer and seller conduct business.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash in banks over FDIC limits, certificates of deposit, accounts receivable, and the promissory note. The Company deposits its cash with financial institutions that the Company considers to be of high credit quality.

The Company's RSCG segment has vendor contracts with Amazon.com, Inc. under which the RSCG segment acquires and sells commercial merchandise. Transactions under these contracts represented 60.4% and 41.6% of consolidated Cost of goods sold for the three months ended June 30, 2020 and 2019, respectively, and 54.5% and 43.9% of consolidated Cost of goods sold for the nine months ended June 30, 2020 and 2019, respectively.

During the three and nine months ended June 30, 2019, the Company had one material vendor contract with the Department of Defense (DoD) under which its CAG segment acquired, managed and sold government property: the Scrap Contract, which concluded on September 30, 2019. Sales of property acquired under the Scrap Contract accounted for 8.2% and 7.8% of the Company's consolidated revenues for the three and nine months ended June 30, 2019, respectively.

Earnings per Share
 
For the three months ended June 30, 2020, diluted weighted average common shares outstanding contains 119,396 shares representing the dilutive impact of stock options, RSUs and RSAs. 3,841,385 stock options, RSUs and RSAs were excluded from the computation of diluted weighted average common shares outstanding as they were anti-dilutive. For the nine months ended June 30, 2020 and the three and nine months ended June 30, 2019, basic and diluted weighted average common shares were the same because the Company operated at a net loss in both periods, causing any inclusion of potentially dilutive securities in the computation of diluted net income (loss) per share to be anti-dilutive. See Note 7 for the amounts of outstanding stock options, restricted stock awards and restricted stock units that could potentially dilute net income (loss) per share in the future.

Recent Accounting Pronouncements
 
Accounting Standards Adopted

On October 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method. Prior periods have not been restated. To perform the adoption, the Company elected several practical expedients, including the package of practical expedients to not reassess prior conclusions on whether a contract is or contains a lease, lease classification, and initial direct costs. The Company also elected to combine both the lease and non-lease components as a single component to be accounted for as a lease, to not recognize lease assets or liabilities for leases with initial lease terms of 12 months or less, and to not use hindsight when determining the lease term.

Upon adoption, the Company recognized $11.3 million of operating lease assets and $12.2 million of operating lease liabilities. The Company does not have significant finance lease assets and liabilities. No cumulative-effect adjustment to opening retained earnings was required. No material impacts were noted on the Consolidated Statements of Operations or Consolidated Statements of Cash Flows. Refer to Note 3 for additional details on the Company’s leases.

10

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


On October 1, 2019, the Company adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As the Company had no stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017, no election to reclassify stranded tax effects from Accumulated other comprehensive to Retained earnings was made.

The Company also adopted the following ASU 2018-07, Improvements to Nonemployee Share-based Payment Accounting, during the nine months ended June 30, 2020. It did not have a significant impact on the consolidated financial statements or the related footnote disclosures.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), or ASC 326. ASC 326, including all amendments and related guidance, was designed to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASC 326 will require estimation of expected credit losses using a methodology that takes into consideration a broad range of reasonable and supportable information. The guidance will be effective for the Company beginning on October 1, 2023 and will be applied on a modified-retrospective basis, with any cumulative-effect adjustment recorded to retained earnings on the adoption date. The Company is in the process of evaluating the impact ASC 326 will have on its consolidated financial statements and expects to estimate credit losses on its financial assets such as its Accounts receivable, Short-term investments, and promissory note. While the Company has not experienced significant credit losses historically, the materiality of the impact of adoption will depend on events and conditions as of the date of adoption, which cannot be determined conclusively at this time.

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU will become effective for the Company beginning October 1, 2020. The Company is currently evaluating the effect that the adoption of this ASU may have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 seeks to improve the consistent application of and simplify the guidance for the accounting for income taxes. The ASU removes certain exceptions to the general principals in ASC 740, Income Taxes, and clarifies and amends other existing guidance. The ASU will become effective for the Company beginning October 1, 2021. The Company is currently evaluating the effect that the adoption of this ASU may have on its consolidated financial statements.
11

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)



3. Leases

The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up to 5.2 years. Some of the leases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant.

The components of lease expense are:
(in thousands)Three months ended June 30, 2020Nine months ended June 30, 2020
Finance lease – lease asset amortization$16  $53  
Finance lease – interest on lease liabilities6  18  
Operating lease cost1,310  3,990  
Short-term lease cost48  92  
Variable lease cost (1)
371  1,122  
Sublease income(61) (200) 
Total net lease cost$1,690  $5,075  
(1) Variable lease costs primarily relate to the Company's election to combine non-lease components such as common area maintenance, insurance and taxes related to its real estate leases. To a lesser extent, the Company's equipment leases have variable costs associated with usage and subsequent changes to costs based upon an index.

Maturities of lease liabilities are:

June 30, 2020
(in thousands)Operating LeasesFinance Leases
Remainder of 2020$1,261  $14  
20214,020  56  
20222,634  55  
20231,886  56  
2024911  56  
Thereafter361  105  
Total lease payments (1)
$11,073  $342  
Less: imputed interest (2)
(1,038) (67) 
Total lease liabilities$10,035  $275  

(1) The weighted average remaining lease term is 3.1 years for operating leases and 6.1 years for finance leases.
(2) The weighted average discount rate is 6.4% for operating leases and 7.5% for finance leases.

Supplemental disclosures of cash flow information related to leases are:

(in thousands)Nine Months Ended
June 30, 2020
Cash paid for amounts included in operating lease liabilities$3,642  
Cash paid for amounts included in finance lease liabilities 26  
Non-cash: lease liabilities arising from new operating lease assets obtained (1)
12,188  
Non-cash: lease liabilities arising from new finance lease assets obtained 10  
Non-cash: adjustments to lease assets and liabilities 1,592  
(1) Amount includes $12.2 million of lease liabilities recognized upon the adoption of ASC 842 on October 1, 2019 (see Note 2).
12

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


4. Goodwill
 
The following table presents changes in the carrying amount of goodwill by reportable segment:
(in thousands)CAGGovDealsMachinioTotal
Balance at September 30, 2018
$21,530  $23,731  $14,558  $59,819  
Translation adjustments(352)     (352) 
Balance at September 30, 2019
$21,178  $23,731  $14,558  $59,467  
Translation adjustments120      120  
Balance at June 30, 2020
$21,298  $23,731  $14,558  $59,587  

Goodwill is tested for impairment at the beginning of the fourth quarter and during interim periods whenever events or circumstances indicate that the carrying value may not be recoverable.

During the three months ended March 31, 2020, the Company identified factors associated with the COVID-19 pandemic that indicated that an interim goodwill impairment test was necessary. These factors included a deterioration of macroeconomic conditions, near-term declines in the Company's results of operations as a result of "shelter-in-place" orders and other related measures, and a decline in the Company's market capitalization.

For the interim goodwill impairment test, the Company performed a fair-value based test for all reporting units with goodwill balances. The fair value of each reporting unit was determined using a discounted cash flow (DCF) analysis. The DCF analysis relied on significant assumptions and judgments about the forecasted future cash flows over the five-year projection period, including revenues, gross profit margins, operating expenses, income taxes, capital expenditures, working capital, and an estimate of the impact and duration of COVID-19 on those factors. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the uncertainty associated with the COVID-19 pandemic, including its extent and duration, actual results could differ significantly from those estimates. The DCF analysis also used included significant assumptions and judgments about long-term growth rates and discount rates.

The fair value of the GovDeals reporting unit is substantially in excess of its carrying value. The fair value of the CAG and Machinio reporting units exceeded their carrying values by 21% and 12%, respectively, as of March 31, 2020. No impairment charge was recorded as a result of the interim goodwill impairment test.

The Company has continued to evaluate the impact of the COVID-19 pandemic on the recoverability of its goodwill. As there have been favorable developments in the factors that indicated a goodwill impairment test was necessary in the previous quarter, the Company did not identify any indicators of impairment that required an additional interim goodwill impairment test during the three months ended June 30, 2020.

5. Intangible Assets
 
The components of intangible assets are as follows:  
  June 30, 2020September 30, 2019
(dollars in thousands)Useful
Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Contract intangibles6$3,100  $(1,033) $2,067  $3,100  $(646) $2,454  
Technology52,700  (1,080) 1,620  2,700  (675) 2,025  
Patent and trademarks
7 - 10
2,322  (923) 1,399  2,276  (712) 1,564  
Total intangible assets $8,122  $(3,036) $5,086  $8,076  $(2,033) $6,043  
 
13

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


The remaining intangible assets balance at June 30, 2020 is expected to be amortized as follows: 

(in thousands)Expected Amortization Expense
Years ending September 30,
Remainder of 2020
$335  
20211,336  
20221,327  
20231,183  
2024645  
2025 and thereafter
260  
Total$5,086  
 
Intangible asset amortization expense was $0.3 million and $0.3 million for the three months ended June 30, 2020 and 2019, respectively and $1.0 million and $1.0 million for the nine months ended June 30, 2020 and 2019, respectively.

The factors associated with the COVID-19 pandemic discussed in Note 4 also indicated that an interim long-lived asset impairment test was necessary during the three months ended March 31, 2020. For each asset group, the Company performed an undiscounted cash flow analysis that relies on significant assumptions and judgments surrounding the forecasts of future cash flows over each asset group's projection period. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the significant uncertainty associated with the COVID-19 pandemic, including its extent and duration, actual results could differ significantly from those estimates.

For each asset group, the undiscounted cash flows exceeded the asset group's carrying value as of March 31, 2020. No impairment charge was recorded as a result of the interim long-lived asset impairment test.

The Company has continued to evaluate the impact of the COVID-19 pandemic on the recoverability of its long-lived assets. As there have been favorable developments in the factors that indicated a long-lived asset impairment test was necessary in the previous quarter, the Company did not identify any indicators of impairment that required an additional long-lived asset impairment test during the three months ended June 30, 2020.

6. Income Taxes

The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded a pre-tax loss in the first nine months of fiscal year 2020 and its corresponding effective tax rate is (8.4%) compared to (8.8%) for the first nine months of fiscal year 2019. The change in the effective tax rate for the nine months ended June 30, 2020 as compared to the same period in the prior yea
r was primarily due to state and foreign taxes. Tax expense in the nine months ended June 30, 2020 is due to state and foreign taxes paid. The effective tax rate differed from the statutory federal rate of 21% primarily as a result of the valuation allowance charge on current year losses and the impact of foreign, state, and local income taxes and permanent tax adjustments.

The Company identified no new uncertain tax positions during the nine months ended June 30, 2020. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of June 30, 2020, none of the Company's federal or state income tax returns are under examination, however, we remain subject to examination for certain of our foreign income tax returns. The statute of limitations for U.S. federal income tax returns for years prior to fiscal 2017 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal 2017 may be adjusted upon examination by tax authorities if they are utilized.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. Based on our preliminary analysis of the CARES Act, we do not expect a significant impact to our consolidated financial statements.
14

Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


7. Stockholders’ Equity

The changes in stockholders’ equity for the prior year comparable period is as follows:

 Common Stock
(dollars in thousands)SharesAmountAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at September 30, 201832,774,118  $33  $236,115  $(6,449) $(100,045) $129,654  
Cumulative adjustment related to the adoption of ASC 606—  —  —  —  730  730  
Net loss—  —  —  —  (5,022) (5,022) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units          409,060  —